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PwC’s Natural Capital Risk breakfast briefing: moving beyond carbon & plugging data holes

Scientists and policymakers convened in Paris recently for the Intergovernmental Panel for Biodiversity and Ecosystem Services (IPBES). They issued a comprehensive assessment detailing the past, present and likely future state of nature, and humanity’s role within it. In short, it underscores how our impacts on nature have left us facing an unprecedented social and ecological challenge.

Not included within the main focus of the report, however, was the impact of declining natural capital on business and financial communities worldwide. Fortunately, this question took centre stage as PwC hosted a well-attended Natural Capital Risk breakfast briefing earlier this month, with representatives from financial institutions, government, NGOs and media all present.

One of the two main objectives of the briefing was to present the new framework supporting financial institutions in assessing natural capital risk and dependency in their portfolios developed by PwC in collaboration with the Natural Capital Finance Alliance (NCFA). The presentation highlighted how the portfolios of financial institutions are exposed to natural capital risks that affect the businesses that they lend to, insure or invest in.

The other key aim of the session was for NCFA to introduce their new ENCORE Tool, designed for exploring natural capital risks, opportunity and exposure across 167 sectors of the economy. By allowing users to visualise at-a-glance how different economic sectors depend on nature, the Tool aims to overcome some of the data challenges which prevent many financial institutions from understanding how environmental changes create operational and financial risks for their businesses.

Data challenges also emerged as a central theme of the panel discussion, as panellists highlighted the scale of the data gaps facing investors who wish to assess their dependencies on natural capital – an obstacle which the ENCORE Tool is seeking to overcome.

Data providers also have a crucial role to play here; although a lot of industry-specific data does already exist, it is often highly specialised, expensive and hard to access. Another gap is easily available data on the location of company held assets, since natural capital risk, such as degrading soils, water accessibility or forest loss, is highly dependent on where these assets are situated. For this reason, industry-wide collaboration is needed to make steps in providing decision-useful, affordable and readily accessible data to financial institutions. They in turn must support these efforts through financial backing and technical consultation.

Another challenge outlined by the panel, lies in developing a shared framework through which this natural capital data can be reported. Participants expressed broad support for a TCFD-like framework on natural capital risk, which would allow investors to make more informed choices based on standardised disclosures and internationally consistent metrics. New technologies will likely play a pivotal role in reducing the time and costs of gathering and analysing related data, in the same way the TCFD have applied Artificial Intelligence to the analysis of the latest disclosures by signatory organisations. Any eventual framework would also likely require the input and buy-in from the accounting and financial professions to ensure it is both fit-for-purpose and that it will be widely adopted. Nevertheless, the main driver behind mass adoption is still likely to be government regulation requiring this, accompanied by other strong financial policy signals, such as the PRA’s recent Supervisory Statement on climate-related financial risks.

A further challenge raised was the importance of framing the language of natural capital in such a way that it resonates with financial institutions; attendees recounted stories of numerous senior executives whom they had witnessed being turned off by the use of complex and technical terminology. The new language of natural capital will therefore need to be simple, accessible and material to the financial and business communities – if it is to gain traction and draw funds away from lending or investment that depletes nature’s services to the economy, and towards investments that restore them, and align with the Sustainable Development Goals.

Finally, there was strong support from attendees for the financial system to move “beyond carbon” if it is to prove resilient in the face of the ecological challenge the IPBES report outlines in stark detail. As the ENCORE Tool demonstrates, the successful operation of countless industries worldwide is highly dependent on natural capital in numerous, interconnected ways. By focusing solely on climate change as a risk mitigation strategy, we ignore at our peril the potential relationship between the erosion of natural capital and financial losses, raising the possibility of a ‘natural capital bubble’. While it is true that climate change does affect natural capital, the opposite is equally true; savvy financial institutions will understand that positive natural capital interventions will result in positive climate change impacts too. For example the preservation of natural habitats (e.g. mangroves, forests, peatlands, wetlands and healthy soils) significantly enhances stocks of natural capital, while also sequestering huge quantities of carbon efficiently and cost-effectively.

The briefing wrapped up with the conclusion that we are living in truly unique times, which has recently seen environmental activists Extinction Rebellion, the Bank of England and the Network for Greening the Financial System all calling for environmental and climate change action, at the same time. Such extraordinary events warrant an extraordinary response, and although each has their role to play in integrating natural capital risk in financial systems – from governments to data providers – financial institutions undoubtedly have a significant role to play in driving this change, and reaping the benefits of early action.

By aligning their lending, investment and insurance underwriting decisions with robust science-based targets, the financial community will help government, business and society take a huge stride towards achieving the much-needed “New Deal for Nature” that will be agreed in Beijing next year. If it allows us to steer clear of the ecological collision course the IPBES report warns us we have embarked on, this may prove one of the most important deals we as humans ever make.

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